How the Co-op Crumbles
By Julie Satow
Sept. 4, 2015
For three decades, Todd Selbert has lived in a sunny one-bedroom on the Upper East Side, surrounded by books, his vast jazz record collection and several abstract oil paintings. A former advertising executive, Mr. Selbert, 75, owns the top floor of a four-story co-op at 150 East 78th Street.
But recently an investor purchased the other three units in the building, and consequently Mr. Selbert may soon find himself a tenant in his own home. He may even face eviction.
“I love my apartment. I love my neighborhood. I love my block,” he said, sitting beside a large window overlooking the tree-lined street. “It is just hard to believe I’ve found myself in this position.”
Co-op apartment buildings like Mr. Selbert’s were once considered impervious to the condominium craze that is sweeping New York City. But with the ever-increasing demand for residential real estate, record high land prices and few available development sites, small co-ops are emerging as one of the few remaining creative development options — albeit a complicated and costly one.
Because of the structure of most co-ops, once developers or investors acquire a “supermajority” of apartments in a building, they can maneuver to evict any holdouts.
“Most co-ops have in their bylaws a provision that if you own a supermajority, usually 75 percent of the shares, you can collapse the cooperative,” said [an attorney]. “Former shareholders then revert to either rent-stabilized tenants or market-rate tenants, in which case they could be evicted.” In most cases, shareholders retain their shares, which results in an eventual payout once the developer sells the building. (And if those shareholders have mortgages, the proceeds from the sale are used to pay off the loans.) But that doesn’t help those like Mr. Selbert, who just want to stay put.
“Every inch of Manhattan real estate is in play, even the once-sacred co-ops,” said Adam Leitman Bailey, a lawyer who represents Mr. Selbert. Mr. Bailey, who won a temporary injunction to stop the collapse, or legal dismantling, of Mr. Selbert’s co-op, said he has a dozen clients in similar situations and that the number of cases he is getting has skyrocketed in the past 18 months.
The buildings most at risk of being caught in the cross hairs are in popular neighborhoods, have unused air rights or lucrative retail spaces on the ground floor and have just a handful of apartments. But buying three-quarters of the shares is no easy feat even in the smallest of co-ops. Multiple shareholders must be convinced to sell, which can lead to infighting and lawsuits among neighbors.
At 253 West 28th Street, a five-unit co-op in Chelsea, shareholders have received inquiries from at least five developers in the past 12 months, said [a lawyer who represents one of the shareholders]. Now, an investor, BH Chelsea Holdings L.L.C., appears to be close to a deal there. But the road to an agreement has been far from simple.
A lawyer for BH Chelsea, declined to comment; residents and their lawyers gave the account that follows.
In 2013, BH Chelsea agreed to buy out four of the building’s five shareholders. But the fifth shareholder sued her neighbors and the investor to stop the deal, and the other shareholders backed out. Then, BH Chelsea sued everyone in the building.
Yet even as their lawyers battled in court, the shareholders continued to negotiate with the investor. Now, all five shareholders are talking with BH Chelsea about accepting individual offers.
Peter H. Mackie, an artist who has lived in the building for three decades, welcomes a sale. BH Chelsea originally offered him $5 million for his sprawling 5,500-square-foot loft, and the deal is now for more, he said.
“My wife passed away, and I’m alone and don’t make big paintings anymore,” he said. “I would like to downsize and concentrate more on managing my wife’s estate.”
Still, he has mixed emotions about leaving his home. “I’ve been here for 30 years of my life, so one part of me is sad that I’m leaving, but another part is excited to start a new life.”
Although she has given the buyer a tentative nod, Jill Greenberg, one of his neighbors, is not as eager to sell. Ms. Greenberg was the original holdout shareholder during the first round of talks with BH Chelsea. Her lawyer, Mr. Bailey, who also represents Mr. Selbert, said the only way she will agree to sell is if the investor meets her price. “We have a number,” he said. “They know the number.”
Because Ms. Greenberg owns the penthouse, she has laid claim to the roof, and has consequently challenged the calculations that determined the percentage of shares accumulated by the buyer. So there has been some question as to whether the investor will have enough shares to collapse the co-op without her participation.
[Redacted] A salesman at Town Residential, he has been working with several developers trying to convince shareholders in various co-ops to sell. “The developers give me the address, tell me what they want to offer and a ceiling, and then send me out with my marching orders,” he said.
[Salesman at Town Residential] employs a variety of strategies, including what he calls “guerrilla marketing,” which involves, among other things, getting inside buildings to slip handwritten notes under people’s doors.
“I write to show them it isn’t just a form letter,” he said, adding: “I tell them I am not looking for an exclusive, but that I am representing a developer who wants to buy their home and is willing to pay top dollar. I tell them we can pay all cash, close in three months and help them find a new apartment.”
He is currently working on three such deals, he said, but all have yet to close, and until then he is reluctant to discuss specifics. “Every deal is totally off market,” he said. “And the developers don’t want anyone to know what they are working on.”
At 1025 Park Avenue, the situation is much simpler — and happier. There, all three shareholders agreed to put the 1912 building on the market. Designed by John Russell Pope, the architect of the Jefferson Memorial in Washington, it was built as a mansion for the composer Reginald De Koven. The five-story co-op is between East 85th and East 86th Streets.
Mary Joan Wilder, 85, an ex-wife of the actor Gene Wilder, owns 75 percent of the shares and could have acted independently. But as soon as she announced her plan, she said, “the other two shareholders pretty quickly followed suit.”
The Tudor Revival building, which has a limestone facade and windowed bays overlooking Park Avenue, is listed at $65 million. The developer Aby Rosen was in talks to buy it last year, but the deal fell through.
“It is a very rare thing to have happened, to have multiple shareholders get together and agree to sell,” said [the salesman] who listed the building almost four months ago.
While 1025 Park Avenue comes with significant air rights and could be converted to a condominium tower, Ms. Wilder hopes it will be returned to its original use. “I would love to see it taken over for a single family,” she said. “It is just too beautiful a building to tear up any more than it already has been.”
And any developer who buys 1025 Park Avenue to convert into condominiums may have to contend with a hefty tax bill. Taxes often derail these transactions, because what is best for the shareholders often results in a huge tax bill for the developer, and vice versa.
“There are two issues with this kind of deal,” said [an attorney], who is working on several such transactions. “How do you stop infighting between shareholders, and how do you structure the taxes?”
From the buyer’s perspective, the best approach is to buy the physical building from the co-op. In that scenario, [an attorney] said, the investor would pay $100 million, for example, for the property, and the co-op would pay taxes on the sale, which would be around $40 million, leaving $60 million to be split among the shareholders. But then each shareholder would have to pay capital gains taxes as well — meaning shareholders would be taxed twice, reducing the final profit.
In the alternative scenario, [an attorney] said, the buyer would purchase shares from each shareholder individually, so the shareholders would pay only capital gains taxes, not the corporate tax. But that could create big problems for the developer once the building is converted and the condos are sold.
If, for example, the co-op originally bought the building for $15 million and then reduced its tax basis to $8 million by taking depreciation deductions, the buyer’s eventual gain can be offset only by the co-op’s basis of $8 million, rather than the $100 million it cost to buy all those shares.
For Mr. Selbert, money is not the object. He is still hoping to hold onto his home.
The trouble started last year, when he and another resident of 150 East 78th Street, both members of the co-op board, approved the sale of the building’s bottom two units to Teodora Zobel. According to the board minutes, Ms. Zobel said she might combine the two units and rent them out.
“We were foolish,” Mr. Selbert said. “We thought we were just being nice guys and letting her have what she wanted. So we both voted yes. Then, of course, it wasn’t long before we discovered we had done the wrong thing and we were stupid.”
Ms. Zobel, Mr. Selbert said, soon approached him and his neighbor about buying their shares. Eventually, the neighbor sold to her, leaving Mr. Selbert as the sole holdout.
Mr. Selbert has sued Teodora Zobel and her husband, David Zobel, and the cooperative. The matter is now in court.
In retrospect, Ms. Zobel said, the deal has been far more difficult to pull off than she imagined. “It’s not an easy way to do business. We are definitely not looking to do it again,” she said, referring to herself and her husband.
If there is a silver lining for Mr. Selbert, it is that even if the co-op is collapsed and he becomes a tenant of his own apartment — or worse still, is evicted — he’ll receive a portion of the proceeds from the eventual sale of the building. But that is small comfort.
“Why would I sell?” he said. “Where would I go to get what I already have?”